Higher Mandated Labor Costs Next Food Industry Challenge

As more and more consumers purchase prepared food rather than cook at home, the currently attractive margins for such offerings face mounting challenges.

Not the least are labor costs, which are under pressure from economic and regulatory trends.  Integrating higher labor costs into the pricing algorithm represents the next major challenge for food sector leaders.

Whether a neighborhood deli, central food kitchen, gourmet restaurant, or fast casual franchise the need to find ways of doing more with the same or fewer employees is expected to become more important in 2017.

At all employee levels from mixer, baker, decorator, sales person, many food industry establishments are facing increased labor costs due to higher demand for workers and regulators intent on raising salaries.  While most news stories focus on the situation as one involving fast food outlets or restaurants, the trend also impacts centralized food preparation centers as well.

These latter establishments will also need to deal with not only competition for workers but higher minimum wage floors in many states.  Already some fallout from this trend is being experienced.  Higher salaries were one of the factors for Whole Foods to close three of its key central kitchens in January.

The increased salary cost trend first noted in 2016 is expected to accelerate as the hoped-for economic recovery picks up steam.  With the greater availability of job openings, food purveyors will need to create more attractive industry opportunities.  Pressure from this trend is expected to ramp up towards the end of 2017.

More immediate and with higher personnel costs are new city and state minimum wage floors that are driving hourly rates to $15.  While popular with some voters, these initiatives directly impact the bottom-line of labor intensive sectors like food preparation and delivery.

For the past eight years, labor costs have been held down by the availability of workers in a less than robust economy.  At the same time, this has been occurring when more and more families have opted to bring home prepared meals and pop them in a microwave or convection oven.  The sale prices of these offerings have provided food and supermarket retail outlets with hefty margins.  Some economists now estimate a majority of American families now rely on outside kitchens for their meals.

However, in many cases the higher labor costs will be difficult to pass on to customers.  According to Dr. Kenneth E. Lehrer, a Houston, TX based economist, higher labor costs will eat away at 2-4% of margins when average required minimum wages hit $14 as expected in 2018. The full effect of $15 minimum wage requirements will hit in 2020 and beyond.

Given these trends, what can food establishments do to protect margins in 2017?

• Develop more efficient operations holding the line on employee growth.
• Introduce strategic distribution programs to reduce costs.
• Add robotic functions where possible.
• Install fuel-efficient machinery.
• Reduce costs of raw materials by using better sourcing strategies.
• Locate is regulatory friendly municipalities.
• Better utilize facilities.

As the prepared food industry matures, there will be greater opportunities for expansion.  The key is doing it more efficiently.

Smaller Companies Want More Certainty, Less Affordable Care Act Regulation

For many small businesses no matter what size, corporate healthcare plans are tinged with uncertainties entering Donald J. Trump’s presidency.

However, Information Strategies, Inc. (ISI) focus groups and other surveys indicate for smaller companies, $10 to $30 million dollars in sales, there are several provisions that would appear to be most needful of change or repeal.

In the six years since passage of the contentious Accountable Care Act (ACA) executives and consumers alike have wrestled not only with its provisions but also the strong employer, individual opposition to many of its mandates.  This has led to a feeling the law would at the least be amended and perhaps even repealed.  As many company leaders pointed out in the run-up to the last Presidential election, this perception restricted implementing longer term business solutions. With a President and Congress controlled by Republicans, in 2017 changes if not outright repeal of ACA provisions are expected. Most of the most sought after changes are also primed to have more bipartisan support.  With this bipartisan support evident, they are expected to be perceived as more permanent than the law itself.

Already, there seems to a more positive attitude toward employer sponsored healthcare solutions.  For instance, despite significant increases in healthcare insurance premiums (9% in 2016 vs. 6% in 2015), a new study from Transamerica Center for Health Studies (TCHS) conducted by Harris Poll found that employers are optimistic about the ability to provide robust benefit packages to employees.

In fact, the number of smaller employers offering health benefits to part-time employees has nearly doubled since 2013 (26% in 2016 vs. 13% in 2013).

In ISI’s focus groups and other polling respondents indicated the following changes small businesses would like to see happen:

• Eliminate all state-mandated requirements so companies can offer one policy to all employees regardless of work location.
• Reduce the number of mandated requirements in healthcare policies to decrease overall costs.
• Permit the purchase of gap healthcare insurance policies with Consumer Directed Healthcare (CDH) funds to better protect employees against catastrophic illnesses or accidents.
• Simplify the regulations to ease need for outside counsel, consultants to interpret.
• Through additional Congressional regulation, greater reliance, encourage CDH offerings, particularly high deductible plans coupled with Health Savings Accounts (HSAs).
• Waive/get rid of penalties for any companies that do not comply with ACA requirements, making them voluntary.
• Increase the HSA limit of families from the current level to a minimum of $10,000 and allow the increase of contributions the match the increase of annual premiums. Meaning if annual premiums are increasing by 10-15%, the contributions should be able to increase the same rate, keeping their HSA fully funded.
• Reduce or eliminate luxury tax on healthcare benefit packages and replace ability to vary plans by categories or salaries.
• Allow for different levels of healthcare insurance for part-time workers. Make identification of these workers more employer friendly.
• Encourage more competition from healthcare insurance providers in the form of new competitors, differing healthcare options.
• Create more flexible methods to provide stipends in lieu of healthcare programs for employees allowing them to purchase individual or supplement insurance.
• Accept or deny elimination of prior health conditions as acceptance criteria.

What does come through from numerous soundings is the desire for many companies to have lower healthcare costs without reduction in the quality of care.  Under the ACA, CDH plans were not encouraged but for a growing group of companies in this sector HSAs are becoming more appealing.

“There is no doubt CDH efforts and most particularly HSAs have a positive effect for employers and employees,” said former White House advisor Roy Ramthun, President of HSA Consulting Services. “What we are seeing is a need for the employee to be more involved in the financial side of the healthcare services area. For companies in the $10 to $30 million range it can make a significant difference in their healthcare costs.”

Many small business leaders are looking for improving the benefits of providing employee healthcare; they are just unhappy with the many mandates, rules, and regulations of the ACA.  They hope for changes in 2017.

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